Buying quality dividend-paying stocks at discounted valuations is often a recipe for success as an investor. Besides the fact that lower valuations hedge against downside risk, they also offer the potential for more upside once markets award them with higher valuation multiples.
Let's look at three dividend-paying stocks with cheap valuations. And keep in mind that as investors wait for markets to warm up to these names, each pays market-beating dividends to shareholders.
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1. Energy Transfer: Debt repayment is paying off
In October 2020, Energy Transfer (ET 0.12%) made the choice to slash its quarterly distribution per unit in half, from $0.305 to $0.1575. The idea was that if the company used its excess capital to repay debt, it would reap the benefits through an eventual upgrade to its credit rating and a higher valuation multiple.
Energy Transfer has reduced its debt to $44.7 billion as of June 30, 2023, a reduction of almost $7 billion since Sept. 30, 2020. Along with bolt-on acquisitions made by the master limited partnership (MLP), this is why it anticipates the target leverage debt ratio will be at the lower end of its 4-to-4.5 target range.
Thanks to Energy Transfer's successful deleveraging efforts, the company has a positive outlook for getting a credit upgrade at all three of the leading rating agencies. A credit upgrade around the corner and approximately 125,000 miles of energy infrastructure that will be needed for decades bode well for the MLP. The company has more than restored its coming quarterly distribution per unit, to be paid on Aug. 21, to $0.31, and it plans on raising it by 3% to 5% annually in the future.
For investors who are OK with the additional effort of K-1 tax forms, this is an especially attractive distribution growth forecast for a stock yielding 9.7%. For context, that crushes the S&P 500 index's 1.5% yield. Energy Transfer's price-to-book (P/B) ratio of 1.2 is also well below its 13-year median P/B ratio of 1.7. As Energy Transfer secures a credit upgrade and continues handing out more distribution raises, there is reason to believe the stock could eventually return to its median P/B ratio.
2. FedEx: Making it possible for the e-commerce industry to thrive
With its average of 15 million package shipments each business day in 220-plus countries and territories around the world, the world relies on FedEx (FDX 0.12%). And dependence on the business is only set to grow over time.
As the global economy grows, so will the demand for e-commerce and package delivery. A study published on Statista projects that global e-commerce retail spending will soar from $5.2 trillion in 2021 to surpass $8 trillion by 2026, which should translate into much higher package volumes across the board for the likes of FedEx and United Parcel Service. This is why the annual earnings growth consensus among analysts is at least in the mid-single digits annually over the next five years.
Income investors will also be drawn to FedEx's 1.9% dividend yield. Given that the dividend payout ratio is set to clock in below 29% in its fiscal year 2024, the company should have no problem handing out annual dividend boosts from the high single digits to the low double digits for the foreseeable future. Topping it off, FedEx's forward price-to-earnings (P/E) ratio of 12.3 is well below the integrated freight and logistics industry average of 15.8.
3. Iron Mountain: Dividend growth has returned
After almost four years of keeping its dividend the same, real estate investment trust (REIT) Iron Mountain (IRM 0.34%) boosted its quarterly payout per share by 5.1% to $0.65 earlier this month. The REIT shifted its business model toward data centers, and this approach led to mid-single-digit annual growth in adjusted funds from operations (AFFO) per share in recent years. As a result, the dividend payout ratio is on track to fall from 81% in 2019 to a much more sustainable mark for its industry of 63% for 2023.
The capital that the company retained in recent years also helped to reduce its net-lease adjusted leverage ratio from 5.7 in 2019 to 5.1 as of June 30, 2023. Put into perspective, that is Iron Mountain's lowest leverage ratio since 2017. So Iron Mountain's 4.3% dividend yield is quite safe for the future. Trading at a current-year price-to-AFFO ratio of around 15 at the current $60 share price, the stock is also a reasonably enticing pick for value investors.
